NABO Economic Trends & Issues (No. 138)

Published on Nov 26, 2025
Published by Macro-Economic Analysis Division

■ Economic Trends

  In recent months, the Korean economy has shown strength in real economic activity in terms of both domestic demand and exports. Yet, financial indicators including interest rates and foreign exchange rates show signs of instability as volatility expands.  

  In September, production increased by 1.0% MoM in all sectors, driven by a recovery of exports in the manufacturing sector and of domestic demand in the services sector. The cyclical component of the composite index increased by 0.2p MoM. Retail sales dropped by 0.1% MoM but climbed by 2.2% YoY. Both construction completion and facility investment showed a significant growth of 11.4% and 12.7% MoM, respectively. On the fiscal side, in July, the government's cumulative total expenditure increased by KRW 39.4 trillion YoY. In October, the trade balance recorded a surplus of USD 6.06 billion, and exports grew by 3.6% YoY. Consumer prices increased by 2.4% YoY, affected by inflation of goods and services prices. In October, the spread between the three-year treasury bond yield and the base rate reached 10 basis points. At the end of October, the KOSPI index closed at 4,107.5, recording impressive growth from late September. In August, household loans continued to grow, with the housing price index and transaction volume both moving upwards in September compared to the previous month. In September, corporate loans increased by KRW 56.3 trillion YoY, and the issuance of stocks and corporate bonds grew by KRW 28.7 trillion MoM. In October, the won/dollar exchange rate rose MoM to KRW 1,423, and foreign reserves also increased MoM to USD 428.8 billion.

■ Economic issue analysis: Impact of the government's housing supply policy on the construction business cycle

   In recent periods, the slump in Korea's construction investment has deepened, exerting negative impact on the country's economic growth. In the third quarter of this year, construction investment decreased by 8.2% YoY, and this decline has continued since the second quarter of 2024, contributing to a reduction in real GDP growth. To address the decrease in housing supply in the Seoul metropolitan area, the Korean government announced 'Housing Supply Expansion Measures'. Against this backdrop, this section analyzes the macroeconomic impact of the government's measures on construction investment and project the timing of a recovery in the construction business cycle.

  To better understand the economic characteristics of the housing construction business cycle, this report constructs leading and coincident indices for the sector and finds that the former hit its trough in June 2024 and the latter in December of the same year. However, a full recovery is projected to take some time as the cyclical component of the coincident index is still hovering around its trough. What is notable about the government's new measures is that housing supply will be managed based on housing starts rather than housing permits as it was in the past. In this regard, this report provides a quantitative analysis of how housing starts affect housing construction investment. The analysis finds that an annual 1%p increase in housing starts leads to a cumulative 0.32%p increase in housing construction investment over one to two years.

  Based on this finding, the government's plan to supply 270,000 units per year in the Seoul metropolitan area is expected to boost housing construction by 1.0%p in the first year and by 2.1%p cumulatively over two years. Unless the plan encounters issues, the housing construction sector is projected to enter a recovery phase between the second half of 2026 and the first half of 2027. That being said, the timing of recovery may be delayed as the projection assumes the government's measures are implemented smoothly as planned and housing starts in non-metropolitan areas remain at the level of the long-term average.